Amid talk of a looming gilt crisis, the French give a lesson in how to do debt in style.
- The French government has collapsed as Prime Minister Bayrou tried to push through reforms
- France’s debt to GDP is now 114% versus 96.1% for the UK
- France’s 10 year bond yield has risen 22.5% for the year to date
After the recent wobble in the UK government bond markets, it is reassuring to know that some countries have it worse. This time round it’s the French, whose government has just collapsed after Prime Minister Francois Bayrou tried in vain to tackle the country’s growing debt burden. While it may be fun to watch our closest neighbours squirm, are there any broader implications from France’s difficulties?
Those who believe the UK has an intractable debt problem need only to look over the Channel to recognise that it could be worse. France’s debt to GDP is now 114% versus 96.1% for the UK. Its total government debt is €3.35 trillion, equivalent to £2.9 trillion. The UK is a larger economy, and its debt is ‘just’ £2.7 trillion.
While the UK government has struggled to push through benefit cuts, France’s pension crisis puts this in the shade. Attempts to raise the pension age have been met with legal challenges and the New Popular Front (which won the 2024 legislative election) have promised to scrap the reforms. Bayrou had tried to save €44bn by scrapping two national holidays and freezing welfare payments and pensions, but was firmly ousted by the National Assembly in a confidence vote.
The problems are starting to be reflected in bond yields. France’s 10 year bond yield has risen 22.5% for the year to date. Even the UK with all its particular dramas has only risen 7.9%. France’s hike in bond yields has come at a time when the ECB has been cutting interest rates further and faster than elsewhere, and also at a time when inflation across the Eurozone is relatively benign.
It is difficult to see a way out of the problem for France. A fractious population appears increasingly unwilling to accept the shift in public spending that is needed. However, while this is bad for France, few see any significant contagion. Guillermo Felices, global investment strategist at PGIM Fixed Income says: “We see the risk of a highly disruptive outcome with major contagion to other European government bond markets as limited.”
“The macro backdrop in Europe is solid and the European Central Bank has the tools needed to limit contagion, notably the Transmission Protection Instrument. While risks remain, France has found ways to muddle through political crisis in recent months and years. Spreads are also already pricing fiscal concerns and political turmoil.”
There has been talk of an EU bailout, but this would seem to let France off the hook for economic mismanagement. In the meantime, France’s government will be praying for a miracle – or economic growth, whichever can be arranged sooner.
